Report on recent US international tax developments - 19 July 2024

Treasury and the IRS this week released final IRC Section 367(b) regulations (TD 10004) (pdf) that address certain cross-border triangular reorganizations and inbound nonrecognition transactions. The final regulations focus mainly on US inbound transactions that result in repatriation of previously untaxed foreign earnings and adopt the proposed regulations without substantive changes. The proposed regulations incorporate, with certain modifications, guidance described in Notice 2014-32 (pdf) and Notice 2016-73 (pdf) (collectively, the Notices), each issued in response to transactions perceived to exploit certain aspects of the then-existing 2011 regulations, Reg. Section 1.367(b)-10.

The two Notices targeted complex transactions involving cash or other high-basis property transferred directly or indirectly from a foreign corporation to its US shareholder. The government believed the transactions were intended to avoid the taxable repatriation of IRC Section 959(c)(3) earnings and profits when the US tax rate was 35%. In recognition of the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) — which introduced the IRC Section 245A dividend received deduction and the global intangible low-taxed income (GILTI) rules — the final regulations (like the proposed regulations) significantly reduce the number of targeted repatriation transactions.

The final regulations apply retroactively to the dates when the pre-TCJA repatriation Notices and the proposed regulations were released. An EY Tax Alert is forthcoming.

There has been a flurry of activity on Capitol Hill following the recent US Supreme Court decision in Loper Bright Enterprises v. Raimondo (pdf), which overturned Chevron deference and now requires lower courts to independently evaluate whether agency actions are within statutory authority. Courts can no longer automatically defer to agency interpretations of ambiguous statutory provisions. On 12 July, Senator Rand Paul (R-KY) announced he was joining Senator Eric Schmitt (R-MO) in establishing a "Post-Chevron working group" that will meet regularly to discuss the "monumental decision in Loper Bright, how to best limit the unlawful exercise of power by the administrative state, and how the Senate can more effectively legislate on matters that regularly would've been left up to agency deference." Sixteen Republican senators, in addition to Sens. Paul and Schmitt, have signed on to the working group.

On the House side, Majority Leader Steve Scalise (R-LA) announced on 10 July that House Republican Committee chairs sent letters to their corresponding departments and agencies requesting review of "various overreaching regulations."

An Organisation for Economic Co-operation and Development (OECD) official this week was quoted as saying the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) is close to finalizing the text for the multilateral convention (MLC) to implement Amount A in Pillar One. The objective of the MLC is to create a coordinated agreement to reallocate taxing rights to market jurisdictions with respect to a portion of the profits of in-scope multinational enterprises in excess of 10% of their global revenues.

The official further said consensus has been reached on virtually all areas of an expanded Pillar One Amount B framework. Amount B is intended to simplify and streamline the application of the arm's-length principle to baseline marketing and distribution activities, with a particular focus on the needs of low-capacity countries (Amount B approach).